Investors flocked to New York Community Bancorp in large numbers on Tuesday, resulting in a steep decline in the stock price. The stock plummeted by 18% to $4.44 per share, with a trading volume of 79 million shares in just a few hours. This figure is over five times the average daily turnover.
The market was caught off guard a week ago when NYCB announced a dividend cut and increased reserves for loan losses by half a billion dollars. Since then, the stock has suffered a staggering 57% loss. This unexpected turn of events has had a ripple effect on both big and small banks, causing a polar vortex in the banking sector. In particular, the SPDR S&P Regional Banking exchange-traded fund has dropped 11% to $46.85 in the week following NYCB’s startling announcement.
Although small banks are often seen as pillars of the community, their long-term performance has left investors disappointed. According to Nicholas Colas at DataTrek Research, the regional banking ETF has remained essentially flat since 2006. This lackluster growth is underscored by the fact that the dividend payout of the ETF’s regional banks has hardly increased during the same period. It was $1.44 per share annually in 2006 and reached only $1.57 per share in 2023.
Colas describes this meager 9% growth in dividend payout over a decade and a half as exceptionally poor. It pales in comparison to the impressive 160% rise in the S&P 500’s dividend payout and the 200% increase achieved by JPMorgan Chase during the same timeframe.
Consolidation in America’s Banking Sector: A Glimmer of Hope
The recent decline in the regional bank ETF has resulted in a meager dividend yield of just 3%. However, investors can obtain a more attractive 4% yield on a 10-year Treasury bond, without the added concern of potential risks, such as another NYCB incident.
To address the challenges faced by America’s fragmented banking industry, consolidation has been widely recommended. Unfortunately, the number of mergers was limited last year due to high interest rates and the negative impact of failures like Silicon Valley Bank. These factors led to a decrease in stock values, making it difficult for potential consolidators to utilize them for acquisitions.
However, there is a glimmer of hope for merger prospects in 2024, as pointed out by Seaport Research Partners analyst Laurie Hunsicker. The high interest rates last year prompted many banks to reduce the value of their securities holdings. Silicon Valley Bank, in particular, suffered significant losses as a result.
Hunsicker believes that if the Federal Reserve starts to gradually decrease rates in the second half of this year, banks may experience an increase in their book values. Consequently, this could lead to a rise in share prices for regional banks and serve as a catalyst to reignite deal activity.
In conclusion, although the regional bank ETF currently offers a modest dividend yield, the allure of a higher-yielding 10-year Treasury bond, coupled with the potential for improved book values and share prices through consolidation, presents a more promising outlook for investors and the banking industry as a whole.